Value-Based Compensation Arrangements Under the New Stark Rules — and What it Means for the Wellness Industry

The physician self-referral law, or “Stark Law,” prohibits physicians from referring patients to receive “designated health services” — payable by Medicare or Medicaid — from entities in which the physician holds a direct or indirect financial interest.

For instance, a physician cannot refer a patient to an entity that provides magnetic resonance imaging (MRI) scans if the physician has a direct or indirect financial interest in the MRI entity. Why? Because physicians should make referrals based on the patient’s best interest, and the allure of compensation may detract from that goal.

Enacted in 1989 and expanded in 1993 with many administrative and enforcement rules to follow, the physician self-referral law was intended “to counter the effects of physician decision making driven by financial self-interest – overutilization of health care services, the suppression of patient choice, and the impact on the medical marketplace.”[1]

Although the Stark Law may seem straight forward on its face, compliance is quite complex. Many “physicians” – which include medical doctors, osteopathic physicians, dentists, chiropractors, and optometrists – now operate in larger health systems or as part of joint ventures among referral sources that blur the boundary lines of compliance.

Some referrals are protected by exceptions. In other circumstances, the physician’s financial relationships or the circumstances of a referral may not be clear. Financial relationships can include ownership or investment interests by family members.

It was the original sponsor of the federal Stark Law – Rep. Fortney “Pete” Stark (D-California) – who said in recent years that the Stark Law, with its many expansions, exceptions, and loopholes, rivals the tax code in terms of the rewrites required.[2]

Most recently, the Centers for Medicare & Medicaid Services (CMS) published a final rule, effective Jan. 19, 2021, that attempts to modernize and clarify the Stark Law.

Specifically, the final rule “establishes exceptions to the physician self-referral law for certain value-based compensation arrangements.”[3]

This article highlights this new exception in the most recent Stark Law regulations, which some general background as to what the Stark law prohibits.

Prohibited Referrals; Designated Health Services

The Stark Law (42 U.S.C. § 1395nn) prohibits self-referrals for “designated health services” payable by Medicare or Medicaid, including the following items or services:

  • clinical laboratory services;
  • physical therapy services;
  • occupational therapy services, radiology services,
  • radiation therapy services and supplies;
  • durable medical equipment and supplies;
  • parenteral and enteral nutrients, equipment, and supplies;
  • prosthetics, orthotics, and prosthetic devices and supplies;
  • home health services;
  • outpatient prescription drugs;
  • inpatient and outpatient hospital services; and
  • outpatient speech-language pathology services.[4]

The physician cannot make a referral to an entity in which the physician (or an immediate family member) has an ownership or investment interest. Certain compensation arrangements can also run afoul of the law’s prohibitions.

In turn, the entity that receives a prohibited self-referral cannot make a claim for Medicare reimbursement for health services furnished pursuant to the referral.

Stiff civil monetary penalties apply to Stark Law violations at the physician and entity levels. In addition, the Stark law is a strict liability statute. Proof of intent or fault is not required. Importantly, not understanding Stark Law is not a defense.

There are numerous exceptions to the ownership and compensation arrangement prohibitions. For instance, in general, it is not a prohibited self-referral for a physician to refer a patient to another physician in the same group practice or HMO.

Further, it would not be a prohibited to refer patients to a non-group practice physician who is renting office space from the referring physician, so long as the rental charges are based on FMV and do not take into account the volume or value of referrals.

“The overall tendency of these exceptions is to exclude from the prohibition financial arrangements that exist for reasons independent of referrals, integrated practices where the designated services are done within the practice, and situations where designated services may not be available in the absence of physician investment.”[5]

Over the years, HHS has added new prohibitions, exceptions, and compliance layers to the Stark Law, attempting to address the rapidly evolving nature of America’s health care delivery and a move toward a value-based payment model.

Value-Based Arrangements

CMS, in issuing the newest Stark Law regulations, sought to address “significant changes in the delivery of health care services and the payment for such services,” aiming to move from volume-based (fee-for-service) to value-based reimbursement.

The Patient Protection and Affordable Care Act (ACA) of 2010 required major changes to the Medicare program’s payment systems and granted the Department of Health and Human Services (HHS) authority to test innovative payment and delivery models.

That has led to the Shared Savings Program and Accountable Care Organizations (ACOs) that share Medicare cost savings when they agree to be held accountable, under program requirements, for the quality and cost of care for beneficiary populations.

HHS is also focused on transforming the health care system from a fee-for-service model to one that pays for value. To that end, the new regulations establish permanent exceptions to the Stark law for “value-based arrangements” in which downstream or upstream reimbursements or payments flow between value-based participants.

This is where the rubber meets the road. There are various definitions that apply in order to meet the exception for value-based arrangement, which means “an arrangement for the provision of at least one value-based activity for a target patient population between or among: (1) The value-based enterprise and one or more of its VBE participants; or (2) VBE participants in the same value-based enterprise.”[6]

Value-based enterprise means two or more VBE participants:

(1) Collaborating to achieve at least one value-based purpose;

(2) each of which is a party to a value-based arrangement with the other or at least one other VBE participant in the value-based enterprise;

(3) that have an accountable body or person responsible for financial and operational oversight of the value-based enterprise; and

(4) that have a governing document that describes the value-based enterprise and how the VBE participants intend to achieve its value-based purpose(s).

The term “enterprise” denotes a large entity, but a value-based enterprise could be comprised of one health care provider that teams up with other clinicians, providers, or suppliers to achieve a value-based purpose for a target patient population.

A target patient population is “an identified patient population selected by a value-based enterprise or its VBE participants based on legitimate and verifiable criteria that are set out in writing in advance of the commencement of the value-based arrangement and further the value-based enterprise’s value-based purpose(s).”[7]

According to the final regulations, “the definition of ‘value-based enterprise’ is intended to encompass a wide range of structures to help facilitate health care providers’ transition to a value-based health care delivery and payment system.”[8]

A value-based arrangement contemplates a compensation arrangement between a physician and an entity (or individual). If the exception requirements are met, these compensation arrangements won’t violate the physician-self-referral law even if the physician is referring or receiving referrals from other arrangement participants.

The value-based participants must be engaged in at least one value-based activity for a target patient population. A value-based activity is the provision of an item or service, the taking of an action, or the refraining from taking an action.[9] The activity must be designed to achieve at least one value-based purpose, which includes:

(1) coordinating and managing the care of a target patient population;

(2) improving the quality of care for a target patient population;

(3) appropriately reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or

(4) transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population.

Thus, a physician who is part of a value-based arrangement may be required to redesign his or her patient care protocols – and to refrain from engaging in a prior protocol practice – to better coordinate and manage patient care or reduce costs.

As part of the value-based arrangement, the physician receives referrals from other participants in the value-based arrangement, or makes referrals to other participants.

value-based enterprise participant means “an individual or entity that engages in at least one value-based activity as part of a value-based enterprise.”[10]

Participants could be clinicians, providers, and/or suppliers that have agreed to collaborate toward a value-based purpose with respect to a target patient population.

Even though the physician has a compensation arrangement with the other participants, these compensation arrangement will not violate the Stark Law.

What Do the New Rules Mean for the Wellness Industry?

Importantly, for the health and wellness industry, the new rules do not appear to limit participants in value-based enterprises to Medicare clinicians, providers, and suppliers.

In theory, this means that health and wellness providers could participate in the value-based arrangement. For instance, value-based arrangements could incorporate wellness initiatives, such as daily activities or weight loss programs that physicians and clinics can monitor to further the purposes of the value-based arrangement.

Referrals to and from these value-based arrangement participants would not violate the Stark Law so long as the requirements of the value-based arrangement are satisfied.

The value-based exception to self-referrals is intended to promote innovation toward value-based payment models. Such innovation could include wellness providers well-positioned for possible participation in value-based arrangements.

Wellness programs and vendors that demonstrate an understanding of laws and regulations that apply to value-based arrangements will be best positioned to take advantage of such opportunities. That could include health technology companies that use data to drive value-based outcomes or improve care coordination.

Future articles will dig deeper on value based arrangements, including the types of start-up or preparatory activities that would be covered by the regulation as individuals and entities transition to value-based care through value-based arrangements.

As with any regulatory or legal issue, the devil is in the details. The new regulation includes nearly 200 pages to consider under the new Stark Law exceptions. If you are interested in creating a Value Based Arrangement, contact the Center for Health and Wellness Law, LLC. We can help.


[1] 85 Fed. Reg. 77492 (Dec. 2, 2020).

[2] Senate Hearing 114-668, Examining the Stark Law: Current Issues and Opportunities, U.S. Gov’t Publishing Office (July 12, 2016).

[3] 85 Fed. Reg. 77492 (Dec. 2, 2020).

[4]  42 U.S.C.A. § 1395nn(h)(6).

[5] Barry R. Furrow et al., Health Law 658 (3rd ed. 2015).

[6] 85 Fed. Reg. 77492, 77497 (Dec. 2, 2020).

[7] Id.

[8] Id.

[9] Id.

[10] Id.